Exclusive: 'Get real' – Darling warns the bankers

Chancellor says return of the bonus culture threatens to undermine global economy again

Alistair Darling has warned bankers to stop backsliding into their bad old ways as he promised a much tougher regulatory system to prevent a repeat of last autumn's financial crisis.

Amid signs that the bonus culture blamed for excessive risk-taking is creeping back in the City of London, the Chancellor declared in an interview with The Independent: "There are people who are too complacent in my view. They need to be brought back to earth."

Mr Darling disclosed that he will try to end a damaging turf war between the Bank of England and the Financial Services Authority (FSA) by giving them both more powers in a White Paper on banking unveiled next week.

He assured the Bank it will play a central role in preventing future booms turning into bubbles and in assessing risks to the entire system as well as individual banks. The White Paper will endorse the Bank's call for financial institutions to have to provide "richer and more frequent" public disclosures of information. And it will back the FSA's demand to be able to extend its regulatory remit – a move which in future could draw hedge funds into its net.

The FSA will be ordered to take a more proactive approach to prevent a return to pay hikes and bonuses to reward short-term profits. If remuneration packages encourage risky behaviour, the FSA will force banks to hold more capital reserves to provide a safety net.

On the bankers, Mr Darling said: "It is not them I am particularly worried about. It is the rest of us who are being affected by it. The individuals concerned [in the banks] are not operating on their own. Some are only operating at all because of very substantial support from taxpayers, who are entitled to tell the Government we must not repeat the mistakes. If they go back to the way they were – to business as usual – without asking themselves over and over again whether they understand what they are doing, that would be disastrous for them and the rest of the world."

The Chancellor admitted the White Paper would not propose a cap on bonuses. "You can't have a pay policy in legislation," he said. But he said: "Every single director of a bank should ask themselves, 'Do I understand what the bank is doing and the risks it is being exposed to?' As the economy begins to recover, people must not drop their guard but strengthen their guard to make sure they don't repeat the mistakes of the past. Similarly, the regulators must keep a very close eye on what is happening and be vigilant about the risks. It is very important people don't get the idea it [the crisis] is all over; that they don't need to bother."

The Chancellor played down widespread reports of a power struggle between the Bank Governor Mervyn King and the FSA chairman Lord Turner of Ecchinswell. But he admitted: "It is very important that, from the Government's and the regulators' point of view, not only to act together, but that we are seen to act together."

The White Paper will be based heavily on a blueprint by Lord Turner in March on learning lessons from the crisis. It will retain the existing three-way split between the Treasury, the Bank and FSA but spell out plans to make them work together more closely and effectively.

Promising that both the Bank and FSA will get the "new tools" they need, Mr Darling admitted there had been a lively debate between them and the Treasury about their respective roles. "In any healthy democracy there is bound to be a discussion. It would be very odd if three people never disagreed," he said.

The big question, he insisted, was not "who does what?" but what new tools the regulators needed to ensure they could "put people on the rack and ask some pretty tough questions".

The Chancellor insisted: "It is not a turf war. It is a question of ensuring they both do the job they are set up to do and both do it effectively. They are not competing with each other. They are complementary."

Mr Darling ruled out Mr King's call for banks to be split between their risky investment and their retail businesses. But the White Paper will suggest that the banks' contingency plans make it easier to see the split between the two functions so that any future rescues would be easier.

Although a new Banking Act will be rushed through Parliament before the general election, the Chancellor conceded that some elements of the White Paper would not be set in stone because of the need for international agreement on some aspects of regulation – mainly with the United States and the European Union.